The fund announced that it had reached an agreement with the Afghan government to renew its program for three years, giving the country’s financial standing a much-needed boost and ending a long period of uncertainty for international donors and the Afghan government about whether an array of small development projects and salary support programs would be able to proceed.
The fund suspended its program more than 13 months ago in large part because of both fraud at Kabul Bank, the nation’s largest private bank, which had caused losses that initially exceeded $900 million, and an overall lack of oversight of the banking system.
“The authorities have made important progress on managing the Kabul Bank crisis that came to the fore in the fall of 2010,” Axel Schimmelpfennig, who leads the fund’s Afghan mission, said in the statement.
“Kabul Bank has been put into receivership, and efforts are under way to recover the embezzled assets from the former shareholders of the bank, which will limit the fiscal costs of the crisis,” Mr. Schimmelpfennig said. He added that overall banking supervision was improving.
“The central bank is also stepping up supervision and ensuring that the banking law and regulations are fully enforced, including on conflict of interest,” he said.
Under the deal, which will extend a modest amount of credit to Afghanistan, the country’s financial system will still have to satisfy the monetary fund that it is working hard to recover the losses from the Kabul Bank debacle. The bank’s receivers and the Finance Ministry are hoping that perhaps as much as 45 percent of the losses can be recouped from the sale of recovered assets, said a person close to the arrangement, who was not authorized to speak to reporters and spoke on the condition of anonymity.
The renewal of the program while the Afghan system is still troubled represents something of a compromise between those who wanted the country to prosecute the wrongdoers in the Kabul Bank fraud and others, especially those who back development, who feared that withholding the monetary fund’s imprimatur would deprive the country of access to money for projects that provide jobs and growth.
“There’s a mix of emotions about this,” said a Western diplomat who is knowledgeable about the monetary fund’s program and was not authorized to speak to reporters. The diplomat added, “There has been definite progress, although there is some ways to go on prosecutions.”
The long hiatus in the program has already cost Afghanistan $70 million that is usually distributed through the Afghanistan Reconstruction Trust Fund, which gets its money from donors and then sends it to the Afghan Finance Ministry, which in turn sends it to other ministries that deliver services and build projects.
The program’s renewal will make Afghanistan eligible again for the trust’s money, and will also increase the confidence of donors who view the monetary fund’s agreement as an important signal of the country’s financial soundness. The program involves little in direct payments, but the I.M.F.’s scrutiny of the monetary and banking systems here acts as a bill of health for other donors, including the United States, Britain and the European Union, assuring them that the country is safe to invest in.
Although the bank’s former chairman, Sherkhan Farnood, and its former chief executive, Khalilullah Frozi, have not been tried, they were detained and placed under investigation by the attorney general’s office. They have since been released with the understanding that they will help the receiver recover the assets, although it is unclear whether they are willing or able to provide much help.
The fraud and lax management occurred almost from the start as Mr. Farnood offered shares in the bank to politically well-connected figures, including Mahmoud Karzai, a brother of President Hamid Karzai, and Abdul Haseen Fahim, the brother of First Vice President Muhammad Qasim Fahim. Other politically connected figures as well as relatives of Mr. Fahim’s brother bought shares and were able to obtain loans worth millions of dollars with little in the way of repayment agreements.
Now the receiver is going after the borrowers’ investments in Afghanistan and in Dubai, where a number of borrowers bought property. Some borrowers have signed repayment agreements, but others have refused. In the meantime the bank has been divided into “a good” new bank, with the deposits, performing loans and other assets of the original Kabul Bank, and a “bad bank,” which has hundreds of millions of dollars in bad loans.
The new bank has been financed by Afghanistan’s Central Bank. The Afghan Finance Ministry has issued a promissory note guaranteeing that it will pay back the Central Bank the full amount of the loan to the new Kabul bank, about $800 million, with a combination of recovered assets and tax revenues, according to people close to the bank. The monetary fund had been concerned that the Central Bank’s reserves would be depleted, but the repayment arrangement appears to have satisfied it.
The monetary fund’s agreement with Afghanistan has been approved at the staff level, but must pass muster with the fund’s executive board. That is expected to happen when the board meets in November.
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